Market Morsel: Basis in a big year

Market Morsel

It is really easy to compare the current prices to recent years. The past couple of years on the east coast has experienced really strong basis levels. This was due to the drought increasing the domestic premium.

In light of the new forecasts from ABARES (see here), the 2020/21 year is closer to the record-breaking 2016/17 year. It therefore makes more sense to look at the bumper year to glean insights into this season.

In general, basis is driven by supply. The higher the supply, the lower basis, and vice versa in years of deficit. This is especially the case in the eastern states which have a large domestic customer base compared to the WA export focus.

The charts below show the seasonality of basis from spot physical to spot Chicago for Geelong and Port Kembla. Overlaid is the average basis for 2017 and 2020.

Basis levels in both zones remained low compared to seasonal expectations and well below the average until the middle of the year.

At the moment basis levels have declined versus Chicago to very low levels. Basis will likely stay low until the second quarter of 2021. Whilst it’s not great to see basis levels so low, the rally of wheat futures during October provided opportunities to lock in high prices

Read here for a refresher on basis, and why it is important.